Gold at $1600? Paul Krugman says it is a nefarious plot by Glenn Beck!

One of Paul Krugman's constant themes is that the U.S. economy is in a liquidity trap and the only way out is for the government to borrow and spend trillions of dollars. (In other words, if we are not prosperous, we spend as though we are, and the debt created through this scheme magically will take care of itself.)

Of course, a liquidity trap also means deflation, as the normal central bank tool of cutting interest rates to stimulate private borrowing cannot work, as interest rates are too low. Thus, the only way out is through massive government spending.

There is a problem with all of this, however, and that is the fact that not only are food and fuel prices rising, but also other commodity prices, including gold, silver and platinum. What's a Keynesian to do?

Well, since Krugman is in that Princeton group with Ben Bernanke and Alan Blinder, all of which utterly disdain gold and believe that anyone who would buy it as an inflation hedge is a "nut case," I was wondering how The Great One would handle the fact that gold prices have skyrocketed.

(As for the rising price of food and fuel, Krugman on many occasions has blamed the rise on "volatility" or demand from other countries. Since he has declared that there can be no inflation in a liquidity trap, the whole matter is settled -- by definition.)

As always, Krugman fails to disappoint. This time we see that the rise in gold prices is the result of a nefarious plot by...Glenn Beck. After quoting at length from The Street Light, which proclaims that gold prices have "nothing to do with the economy," Krugman declares:

Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold.

Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.

Here is the problem with Krugman's analysis: if Glenn Beck and his friends are secretly buying gold in order to entice other people to buy it so that the price will go up well past its fundamentals, they are playing a dangerous game with their own money.

Remember the Hunt Brothers in the late 1970s when they tried to corner the world market on silver? In the short run, they drove the price to nearly $50 an ounce before the whole scheme collapsed. The biggest losers were the Hunts, who lost big when silver dropped to about $11 an ounce in two months (after the scheme was exposed), and then were driven into bankruptcy in 1988 after investors filed numerous lawsuits against them.

Now, I am no expert in buying gold or other commodities, but I don't think that Glenn Beck or any other investor is secretly manipulating the price of gold or anything else. Inflation is a real possibility, given the fact that the U.S. Government has been sending dollars around the globe in an attempt to paper over the financial weaknesses both of banks and central banks. Krugman's insistence that debasing the dollar is the key to prosperity does not exactly give me confidence that I should follow his investment advice and buy government bonds.